MACD is not just any indicator; intelligent use of this indicator can help us to be in tune with the market and gain precision when positioning ourselves in the profit line. The MACD indicator allows us to measure the intensity of the market, see if the trend of the movement is going to continue or is going to turn in the opposite direction. It is based on the use of moving averages combined with a histogram of the oscillator.
How does MACD work?
The first thing you have to know is that it is an indicator of the trend-following type with two parts. The MACD itself (the lines) and the MACD histogram (the bars). The MACD histogram (known as MACDh) only measures the distance between the two MACD curves, but visually it is advantageous because it tells us at every moment who is in charge, whether the bulls or the bears.
Not only that, but it also shows us if those in charge are still strong or if, on the contrary, they are losing ground.
MACD is a measure of how two moving averages (usually two exponential averages of 12 and 26 periods, respectively) come together and move away.
Subtracting the position of these two means, you get the mainline of MACD The second line considered the signal line, is not more than a moving average of the first line (specifically an EMA9, an exponential of 9 periods) and that will be crossed every few time with the mainline.
How do we use that information?
MACD lines can be used in two ways:
- Either we buy and sell attending to the crossings between these two lines
- Or, we buy when both go above zero and sell when they go negative.
These are the two classic ways to use MACD as an input and output signal in your operations.
But, why stay there?
MACD and Stochastic: A Double-Cross Strategy.
Using this strategy, you will be able to change the intervals, finding optimal and consistent entry points. That way both active, traders and investors, can be in the first line with a simple adjustment.
Don’t be shy about using both indicator intervals and you will realize how the crossovers will line up differently, so the rest is select the number of days that is more suitable for your trading style.
Just for fun, add a relative strength index (RSI) indicator into the mixer and get a profit drink.
Botton line
The MACD Indicator is an exciting source of price direction changes when looking for trend lines, supports or resistances.
It is very dangerous to trade only with the signals given by the indicator; this can make a strong profit when we enter vertically but also to a minor in stages.
The divergences between the MACD and the price chart can anticipate partial or permanent address changes of the asset, but they are just a message, they should not be taken as a definitive signal.
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